Update: The post below was written in 2014. This post has since been revised for 2015. You can find the 2015 post here.

Before we can get into the details of this post, I’ll provide some background information. Like all US citizens, professional athletes must pay both federal and state income taxes. However, under what is commonly referred to as the “jock tax”, professional athletes pay state income tax in each state they play. The legal theory is that you are required to pay state income taxes in the state you earn that income and thus the professional athletes earn income in the stadiums they play in each season. But how much income does an athlete “earn” in each state? Does a player earn their money only by playing games or do they earn their money when practicing, making media appearances, offseason workouts, etc.?

To solve this problem, states have generally adopted what is known as the “duty day” method to calculate how much income athletes earn in their state. This method is calculated as the percentage of duty days spent in the respective state compared to the total duty days that athlete had that season multiplied by the player’s salary.

Because each state has the ability to create their own method not all states adopt the “duty day” method (Tennessee) and not all states define duty day the same way. A duty day is generally defined as a day when an athlete participates in any form of team activity. This includes official offseason workouts, playoff games, preseason games, travel days, etc. However, Arizona is one of the states that does not follow the popular definition of duty day. Arizona defines a duty day as “all days during a taxable year from the beginning of a professional athletic team’s first regular game of the season through the last game in which the team competes.” While calculating duty days from the first regular season game may not seem significant, this small change in calculation saves certain professional athletes millions of dollars. Why did Arizona adopt this non-traditional approach to duty day calculations when they enacted this rule in 2000? A very brief Arizona sports history lesson - Arizona didn’t get a professional football team until 1988, a professional basketball team in 1968, a professional hockey team until 1996, and a professional baseball team until 1998. However, Arizona has had MLB teams conduct their spring training in Arizona since the Detroit Tigers trained in Phoenix in 1929. In 2000 when this rule was being considered, all 30 teams conducted spring training in only two states - Florida or Arizona. The catch – Florida doesn’t collect income tax at all. Therefore, had Arizona decided to adopt the traditional duty day calculation that most states have adopted they would be collecting 4.5% of every MLB player’s salary during spring training while teams training in Florida would have been playing tax free. Fearful that players and teams would move their spring training locations to Florida (or another state that doesn’t charge income tax e.g. Texas), Arizona valued the economic impact that spring training brings them over the economic impact taxing MLB player’s salaries would bring Arizona. This is a big win for MLB players because regardless of which team they play for, they are not taxed for state income taxes on at least 20% of their salary each year. Players in other professional sports leagues generally have to pay state income tax on 100% of their income so by Arizona passing this law it costs the state lots of tax revenue but gives MLB players a nice tax savings each year. Be sure to follow us on Twitter for the next few weeks as we will reveal each day that an MLB team reports for spring training which players benefit most from Arizona’s minor difference in duty day calculation. A few teams have already reported so here is a short list of some big tax savers.

FYI – if Arizona had taxed the 15 MLB teams that had spring training in AZ last year they would have received over $14MM in guaranteed tax revenue. The reported economic impact of spring training to the Arizona economy (not to the AZ tax revenues) for 2012 was $422 million. Do you think Arizona made the right choice?

Major league players do not get a salary base pay until the regular season starts. During spring training all players get paid the same per diem per week. Those players' tax numbers for spring training are 100% inaccurate because none of them are getting paid a salary at that time. AZ is not getting ripped off at all in this deal. It's simply trying to lower the rate so that maybe it would lure top flight free agents to maybe consider playing in AZ.

Reply

Jonathan Nehring

2/23/2014 15:05:31

John,
While I appreciate the comment and interaction, I disagree with your discrepancy in the accuracy of my numbers.
You are correct that players receive a per diem while in spring training and are also correct that most leagues do not pay their contract salary until the regular season begins. However, individual states do not look at when the salary was actually earned for tax purposes but when it was effectively earned.
As my article describes, states generally describe a “duty day” as “any day an athlete participates in any form of team activity”. This general definition does not take into consideration whether the athlete was paid for that activity or not. How AZ differs from the general rule is they define duty days as “any day an athlete participates in any form of team activity beyond the first game of the regular season”. Compare that to Louisiana’s definition of a duty day as any day spent “rendering a service for the team”. Is playing in a preseason game or participating in a practice “rendering a service for the team”? I believe the industry would conclude practice or preseason games to be a rendering of a service for the team.
Had Arizona adopted the same law that Louisiana (and most of the other states) did, they would tax all the MLB players on a portion of their salaries “earned” in preseason. Therefore, not taxing them on income other states would tax them on equates a tax savings for the athletes that compete in Arizona.
Being taxed on days you are not paid or taxed for more than you earn may seem inequitable but that is for politicians to decide and the current general process in calculating income “earned” in most states. I encourage you to read an article written by K. Sean Packard, CPA that illustrates the inequity of this taxation process in relation to postseason games.
Thanks again for stopping by!
Jonathan

Reply

Jonathan Nehring

2/23/2014 15:09:28

The link to Mr. Packard's story did not hyperlink into my comment. The link to that story is - http://www.forbes.com/sites/kurtbadenhausen/2014/01/27/new-jersey-taxes-could-eat-up-all-of-peyton-mannings-super-bowl-earnings/

Harley Duncan

3/1/2014 19:21:32

Your conclusion regarding the tax savings that AZ provides to MLB players fails, I believe, to account for the tax the player will pay in his state of residence if he resides in an income tax state. The state of residence may tax the player on his entire income regardless of where earned. The resident state then provides a credit for taxes paid to another state so that all the income is taxed just once, roughly speaking. By not including spring training duty days, Arizona law reduces the tax paid to Arizona, but increases the tax paid to the state of residence. In other words, the income tax revenue that Arizona decided to forego ends up being received by the state of residence. The player is left essentially in the same position, depending on the rate of tax in the state of residence compared to Arizona.

Reply

Jonathan Nehring

3/29/2014 10:30:31

Harley,
I completely agree with your statements. The focus of this article was to highlight how Arizona tax law has reduced MLB players AZ tax liability but for the sake of keeping the article short and easy to understand I did not expand on the overall tax effect this law brings. For the sake of simplicity among my articles, I generally assume athletes reside in a state without income tax so this AZ tax law would create an overall tax benefit to MLB players. However, as you described, players who are residents of any state with an income tax rate higher than 4.5% would see no changes in their overall tax liability as a result of this AZ "duty day" calculation.
Thanks for stopping by and commenting!
Jonathan